Around the world, buildings are responsible for approximately one-third of greenhouse gas emissions. In major cities, the percentage is often much higher—a 2007 study by the City of New York puts the number there at 79 percent. Any path to environmental sustainability will require dramatic improvements in the energy and water efficiency of our buildings.
The challenge is how to implement these needed improvements on a global scale, particularly in existing buildings. There are significant financial obstacles to retrofitting existing buildings. Few owners have the resources to invest in a major retrofit, even if they understand the long-term environmental and financial benefits. Increasing building efficiency on a large scale requires creative public policy to overcome these barriers.
Unfortunately, building efficiency is a low priority for most local governments, and few have made much effort to significantly improve overall building efficiency in their communities. It’s not an issue that most politicians consider “sexy.” Thankfully, a few far-sighted cities have taken up the cause. One of the most advanced is Melbourne, Australia.
Melbourne has a long history as a sustainability leader. In 2002, the city established the Zero Net Emissions by 2020 program, and just last April it was certified by the Australian government as carbon neutral. The city has recognized that its 1,800 commercial buildings are responsible for more than half of its current greenhouse gas emissions, so in 2011 it introduced 1200 Buildings, a program to retrofit two-thirds of them.
What sets 1200 Buildings apart is the way it removes financial barriers that prevent commercial property owners from improving the efficiency of their buildings. In cooperation with the State of Victoria, the city created a new financial vehicle, dubbed an Environmental Upgrade Agreement (EUA). An EUA is a three-way contract between the lender, the city and the building owner. The lender provides financing to the owner, the loan repayment is collected by the city through a property tax assessment, and the city repays the bank. Simple enough, but an EUA has numerous benefits, compared with a traditional commercial property loan, including more competitive interest rates, no collateral requirements, longer terms and no re-financing risk. On top of that, the loan stays with the property in the event of a sale, so the new owner, who benefits from the retrofits, assumes the associated charges.
Perhaps most important, however, EUAs establish new means to overcome the “split incentive” so common in commercial property, where owners shoulder all the costs of efficiency upgrades, but tenants reap all the benefits. The split incentive prevents most commercial retrofits from ever taking place. By making the costs and benefits of efficiency upgrades perfectly transparent, however, EUAs bring the incentives of owners and tenants into alignment. Costs and benefits are shared, and everyone wins.
Melbourne’s goal is to reduce energy use in each upgraded building by 38 percent. Across 1,200 buildings, that would yield a substantial savings of 383,000 tons of emissions each year. But if other cities are inspired to follow its lead, Melbourne’s true impact may ultimately be vastly larger.